Business owners should take a critical look at their business at least two years before they intend to put it on the market. It is best to try to view the business as you think a buyer would and identify the pros and cons of the business. Consider the following elements: operations, facilities, competition, clients and customers, management and key employees, market share, technology, websites, and growth opportunities. It may be prudent to hire an independent consultant to help with this analysis.
More…Identifying problem areas within a business and taking corrective action are often the keys to maximizing the value of a business. Most closely held small businesses have annual revenues of five million dollars or less. Such small businesses are typically run and managed by owner / operators who make most of the important decisions in their businesses. The owners are often successful, take charge, non-delegating types who may have nurtured and grown their businesses from inception. These are some of the same characteristics that may have to be mitigated in order to increase the ultimate value of their businesses.
Spruce up the facilities, stay current and abreast of your products and services, know the practices of your competition and follow industry trends. Pay close attention to payroll with a sharp eye on minimizing overtime and bloated salaries.
One of the most common problems in service businesses in particular is the owner often does most if not all of the job pricing and is reluctant to delegate this critical function to others. It is easy to understand how customer relations may have grown over the years and certain dynamics between the customer and the owner may play or have played a part in winning the customer’s business.
Smart owners train and delegate pricing and estimating to others or he or she runs the risk of being thought of, as “the business”. Even better, is to invest in technology and utilize industry software estimating programs.
Remember, tacit knowledge is what is in someone’s head, usually the owner’s and explicit knowledge is what is written down and easily transfers. Software programs, manuals, and written policies are all examples of explicit knowledge. Buyers will gladly pay for explicit knowledge and rightfully assess higher risk and therefore lower value to tacit knowledge. There may be a huge amount of tacit knowledge in the head of the seller but if he can’t shake it out and transfer it, what value is it to a buyer? Obviously, not much!
Another area of importance is the accounts receivable aging report. Some long time customers may over the years have turned into slow paying customers. For obvious reasons, business owners may have looked the other way and over time a slow paying trend may have turned into a pattern of habitual lateness in paying bills. This is often as much the fault of the business owner for allowing unusually liberal payment terms as it is of the customers or clients who grew dependent on taking advantage of what may have originally been intended as an accommodation or as a courtesy during hard times.
Most buyers, large or small, strategic or individual will discount one hundred percent annual revenue from any clients or customers who have regular track records of paying their bills beyond ninety days. Buyers have to obtain increased lines of credit to carry these slow bill payers and they understand that as new owners, if they insist on having these clients and customers conform to tighter payment terms they may lose them to competitors.
Sellers significantly enhance the value of their businesses by having all of their clients and customers pay their bills in a timely manner. All bills should be paid within ninety days of delivery or of service.
Following these steps dramatically increases the chances of maximizing the value of your business and you will reap the rewards!